SYDNEY, Sept 4 Australia's central bank held
interest rates at 3.5 percent for a third straight month on
Tuesday saying past cuts had yet to be fully felt, even as
another local miner blamed falling export prices for slashing
ambitious expansion plans.

The Reserve Bank of Australia (RBA) ended its September
policy meeting sounding cautiously upbeat on the domestic
economy, a view that should be supported by growth figures for
the second quarter due out on Wednesday.

Yet there was also an admission of doubt on China, a shift
for a central bank that has been doggedly optimistic on Asia's
biggest economy and Australia's most valuable export market.

"Growth in China remained reasonably robust in the first
half of this year, albeit well below the exceptional pace seen
in recent years," said RBA Governor Glenn Stevens. "Some recent
indicators have been weaker, which has added to uncertainty
about near-term growth."

The slowdown in China has savaged prices for key commodities
such as iron ore and led miner Fortescue Metals Group
on Tuesday to slice planned investment spending for fiscal 2013
by $1.6 billion to $4.6 billion.

"This has happened much faster and the fall is much sharper
than anyone had anticipated," Fortescue CEO Nev Power told a
media briefing on Tuesday.

Falling commodity prices are a key reason investors are
wagering the RBA will have to cut rates further, following
easings in May and June. Interbank futures put a 60
percent probability on a move in October and are more than fully
priced for a cut to 3.25 percent in November.

Overnight indexed swaps, which show where the
market thinks the cash rate will be over time, put rates at 2.87
percent in 12 months. Yields on Australian 10-year bonds are
down at 3.00 percent, so it is cheaper for the government to
borrow for a decade than for banks to borrow overnight.

"For us the only thing of significance was the softening of
its assessment of China and Asia where they talked about some
weaker recent indicators in China and weaker Asian growth," said
Su-Lin Ong, a senior economist at RBC Capital Markets.

"There doesn't seem to be any real urgency, but we are still
looking for a cut before year end."

The Fortescue news initially tipped the Australian dollar
down to a five-week trough of $1.0224, before it later
steadied at $1.0270.

A drop in the currency could actually please the central
bank as its persistent strength has been at odds with the
weakness in the country's commodity prices.

Spot iron ore, Australia's single biggest export earner at
more than A$60 billion a year, has tumbled by one-third since
early July . If sustained, that will eat into both
miners' profits and government tax receipts.

Q2 GROWTH STILL LOOKING OK

But while some commodity prices have been falling, the
country has been selling more of the product, and it is export
volumes that matter when measuring inflation-adjusted gross
domestic product (GDP).

Data out on Tuesday showed export volumes rose 3 percent in
the second quarter from the previous three months, to add 0.3
percentage points to economic growth. The country's current
account deficit, the broadest measure of trade and investment
flows, narrowed to A$11.8 billion, from A$13 billion in the
first quarter.

The combination of the export volumes with resilience in
household spending and business investment makes analysts still
expect a robust reading on second quarter economic growth on
Wednesday.

Forecasts are for a rise of 0.7 percent in the second
quarter, on top of the first quarter's resounding 1.3 percent
increase. That would leave Australia's GDP -- A$1.4 trillion at
the end of March -- 3.6 percent higher than the second quarter
of last year, handily outpacing most of its rich-world peers.

Also adding to growth was a surprisingly strong 1.9 percent
increase in government spending with investment the highest in
two years. This could add almost 0.5 percentage points to GDP.

Total federal and state government spending amounts to 23
percent of annual GDP. They are the biggest employer, with
around 1.9 million workers.

Still, fiscal policy is being steadily tightened as the
Labor government strives to return the budget to surplus by June
2013, years if not decades before many other rich nations aim to
end deficits.

Prime Minister Julia Gillard on Tuesday again sought to
allay concerns over the economy, saying reports of the death of
the mining boom were exaggerated and benefits would flow for
decades yet.

"I talk of "decades" because the Asian Century stands firmly
behind the peaks and troughs of the business cycle," she told a
conference in the mining centre of Perth. "It's happening on our
doorstep. And it's not even half-way done."